Steve Wevodau

After Madoff, donors grow wary of giving

POSTED BY STEVEN WEVODAU

By Elizabeth Bernstein
THE WALL STREET JOURNAL

Ever since news reports began surfacing last week that a number of charities appeared to have lost millions of dollars invested with Bernard Madoff, Bill White has been fielding phone calls and e-mails from nervous donors to the two New York nonprofits he runs.

Each asked if the charities — the Intrepid Sea, Air & Space Museum and the Intrepid Fallen Heroes Fund, a foundation that helps wounded soldiers and their families — had invested with Madoff. One, who was considering making a gift of almost $1 million to the museum’s endowment, also wanted to know if it had invested with American International Group Inc. or any automotive companies.

White assured the callers that his nonprofits had not invested money with Madoff or in the car industry. He carefully detailed the charities’ portfolios — which he says include some investments in a profitable division of AIG — and offered to let donors talk to the chairman of the investment committee.

“We’ve had lots of people in the past say what we can use the money for and can’t use the money for,” says White. “But we have never ever had anybody ask us what we are investing the money in.”

That’s changing amid a distressed economy and the disturbing news that many high-profile nonprofits, including the Elie Wiesel Foundation for Humanity, Yeshiva University and Steven Spielberg’s Wunderkinder Foundation, were hurt by Madoff’s alleged $50 billion Ponzi scheme. Now, an increasing number of donors are losing confidence in the ability of such groups to safeguard their money.

Wall Street dip has hurt

Donors may have reason to be concerned. Aside from the losses allegedly sustained by nonprofits in the Madoff mess, foundation endowments nationwide have lost 30 percent of their value, or about $200 billion, since the Dow Jones Industrial Average peaked in October 2007, according to the Council on Foundations, a trade group based in Alexandria, Va. Yale University, for example, recently estimated its endowment, which holds many illiquid assets such as real estate and private-equity investments, has fallen 25 percent since June 30.

The school, higher education’s second-richest, said its endowment now stands at about $17 billion, down from $22.9 billion on June 30.

Making matters worse, the growing lack of confidence in nonprofits comes during the most important time of year for charities. Many raise 50 percent or more of their annual budget between Labor Day and New Year’s Day. But in a survey released last week by the Center on Philanthropy at Indiana University, almost 94 percent of nonprofit professionals reported that the economy is having a “negative” or “very negative” effect on fundraising.

Madoff’s alleged scam isn’t the first time that reputable, well-meaning charities may have been swindled. In the mid-1990s, for example, charities, churches, colleges and donors reportedly lost more than $100 million in a Ponzi scheme perpetrated by the Foundation for New Era Philanthropy, which promised to double their money through matching gifts from anonymous donors.

Pay more attention

But the Madoff scandal, due to its enormous size and the reputation Madoff had as a blue-chip manager, has captured attention as never before. “It’s a call to arms for donors to pay more attention and to check up on how the charitable resources are being handled and invested,” says Daniel Borochoff, president of the American Institute of Philanthropy, a watchdog group in Chicago.

Donors have become adept at researching how charities spend their money, digging into their administrative, fund-raising and program expenses. Now, Borochoff says, they must become equally diligent at checking out how charities invest it.

Philanthropy advisers say that for small donations — anything under a few hundred dollars — it may not be necessary to do hours of research. Choose a well-respected local or national charity and check out its Web site to see how much information it is willing to share, such as its Internal Revenue Service filings.

But for more substantial gifts, you may want to take the approach adopted by the donor who was considering giving almost $1 million to the Intrepid museum. He asked pointed questions about whether the nonprofit had a stake in specific risky investments, and where the organization was getting its financial advice. White, the nonprofit’s president, was candid in his answers and, in the end, the museum got the gift.

“It’s essential to do your due diligence,” says Bruce Mosler, CEO of Cushman & Wakefield, a global real-estate-services company based in New York. He says he gives 20 percent of his income away each year and will be more selective about where he gives it because of the weak economy.

Here’s a guide to evaluating whether a nonprofit is investing responsibly:

>> Look for transparency. Many experts say that a truly transparent charity will provide key financial data on its Web site, including its annual report, an audited financial statement and its Form 990, which shows the organization’s assets and liabilities, what it pays top staff, how much money it gives away and how much it spends on overhead. If the data aren’t readily available, “then you’ve got a charity that’s not paying enough attention to where the money comes from and where it goes,” says Paul Light, a professor at New York University’s Wagner School of Public Service.

If the charity doesn’t post these data online, you can call and request them. A nonprofit must provide access to its Form 990 to anyone who asks. Donors can also ask if the group has an investment policy statement, which should detail the group’s investment goals, the benchmark criteria it uses, the criteria for its investment decisions and how often its investment committee meets.

The charity should willingly and clearly answer your questions. If it does not, that’s a red flag, says Light.

>> Find out how much the charity is investing — and with whom. Exactly how much of its money a charity should invest is a matter of debate. While some philanthropy experts say a group should spend all of its money each year on its programs, many believe that a healthy nonprofit will have six months to a year-and-a-half of operating expenses in reserve. That is often separate from its endowment.

Check group’s mission

Philanthropy advisers say it’s not necessarily a problem if a charity doesn’t have an endowment. The amount of money a nonprofit invests will also depend on the group’s mission. Some, such as universities, take a long-term investment view to plan for future capital expenses. Others have a greater need to spend their money immediately. “If you are raising money to help people in the Congo and people will die if they don’t get help, it’s ridiculous to have a huge endowment,” says Borochoff, the charity watchdog president.

Many details of a charity’s investments — and even its managers — may be found in its Form 990 and attachments. If you can’t find the form on its Web site, try GuideStar.org, which collects financial data from nonprofits. (Not all charities disclose everything they should, though.)

>> Ask who is giving it financial advice. You want to know who is on the board and, most important, if there is an independent investment committee. Any charity making significant investments should have one, made up of members with a variety of financial expertise. It should meet at least quarterly, if not more often, advisers say.

Check out the group’s auditors. Are they licensed? Has anyone heard of them?

Additional Facts

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